According to Michael Lebowitz at 720 Global, this idea holds
especially true when you examine the valuation of companies'
stocks to how much they're actually selling, also called the
price-to-sales ratio, or P/S ratio.

"At its current record level, the P/S ratio leads us to one of
two conclusions: 1) Investors are extremely optimistic about
future economic and earnings growth or 2) Investors are once
again caught up in the frenzy of an equity bubble and willing to
invest at valuations well above the norm," Lebowitz said in a note on Tuesday.

"Either way, the sustainability or extension of the current P/S
ratio to even higher levels would be remarkable."

Currently, according to the note, the S&P 500's P/S ratio is
"now 2.50 standard deviations from the median" and roughly equal
to the level just before the bear markets of 2000 to 2002 and
2007 to 2008.

720
Global

There are two important things to understand in order to get why
this elevated P/S ratio will cause troubles, Lebowitz said.

As revenue expectations rise, so too should stock prices. And
investors will pay more for a company that is expected to grow
revenues by 10% than one that will grow revenue by 2%.

"Purchasing a mutual fund, ETF, or an equity security is
essentially buying a claim on a potential future stream of
earnings cash flows," Lebowitz
wrote.

"The odds, therefore, of a rewarding investment are substantially
increased when a company, or index for that matter, offering
substantial market growth potential is purchased at a lower than
average P/S ratio. Value investors actively seek such situations.
Logically one would correctly deduce that P/S ratios should tend
to follow a similar directional path as expected revenues."

Additionally, sales and earnings follow incredibly closely with
GDP growth. So expected sales increases should track along the
same path as expected economic growth, according to Lebowitz. With
economic growth projected at around 2% as far as the eye can see,
revenue growth should also follow those muted expectations.

Given those two factors, the current lofty P/S ratio for the
S&P 500 is either a reflection that investors are seriously
encouraged by the possibility of strong revenue growth above the
current trend, or they are stuck in a bubble fervor fueled by a
lack of other places to invest.

"Perhaps the lack of viable options for investors to generate
acceptable returns, has them reluctantly ignoring the risks they
must assume in those efforts," Lebowitz wrote.

"If that is indeed the case, then one should also consider the
possibility that the next correction will extract more than a
pound of flesh in damage."